How much company stock should you keep in your 401K?

Company stock is seldom a wise investment

How much company stock should you keep in your 401K?

The answer in my opinion is none. The company you work for provides you with income, most likely health insurance, perhaps even vision and dental and a pension plan. Your company may be providing a car and vehicle allowance. They may even be paying for your cell phone or internet connection. You have quite an investment in the company you work for. If the stock of the company goes to zero you will likely lose your job as well as your paycheck and benefits. Given this scenario do you really want to loose your 401K as well?

I was talking to a guy five or six years ago, this man was forty five at the time working for General Motors as an engineering manager. His wife was working at a bank part time. They were both contributing to their 401Ks. He proudly told me he had $150,000 in his 401K and was pretty proud of it. I acknowledged his fine achievement. During the course of the conversation I discovered he had ninety five percent of his 401K money in General Motors stock and the remaining five percent in Fidelity Pacific Basin Fund. His wife had half of her 401K in the bank stock. I advised him to cut back on the company stock of both companies. He defended his investment saying that General Motors was a great company and his wife’s bank was great as well. He even told me he had options to buy company stock at various strike prices.

This man was very poorly diversified. Even the mutual fund he held was a sector fund investing in one region of the world.

Fast forward to when the the financial crisis hit in 2008. I know from a common acquaintance that the man lost his job at General Motors and was aggressively looking for work. I am told his wife has had her hours cut at the bank. They had two children in high school. I really hope he took my advice and sold his company stock. General Motors as most of us recall went bankrupt and their stock went to zero. That $150,000 is probably worth $10,000 today if he did not diversify. I know the bank stock dropped by at least one half before it was acquired by another bank.

I share this story because too many people invest too much in their company’s stock and want to illustrate the pain that can come from investing that way!

Too much company stock can lead to this!

Source

Some 401k plans require the employee to invest in company stock to get the match

While it is true many organizations do require the 401K investor to buy company stock often there is a holding period on the stock. At that time I recommend selling the stock and getting into other investments.

If the holding period ends at the end of the year do you sell it all on the first of the year? I would not. If the company has held up for the holding period say two years chance are the stock is not going to drop off of a cliff the first week of January. I recommend selling it off slowly the way you invested into the stock you bought the stock over time; a good strategy is to sell it off over time. Chances are the stock may go higher and you will wish you would not have sold it on a given day. I can remember sitting in my cubicle checking the price of the company stock at three o’clock. If the price was up I would sell some off. If the price was down I would wait for another day.

What ever you do please don’t end up like the poor fellow who worked at General Motors. Diversify your investments. Configure a good asset allocation Invest in the very best mutual funds, Small cap funds, International funds, Bond funds and even concentrated funds you have available in your 401K. Even a Target Date Fund is a better alternative.

Again how much money should you keep in your 401K in company stock? As little as possible!

Comments 4 comments

DiamondRN profile image

DiamondRN 6 years ago from Charlotte, NC USA

If the company goes under, so does your retirement. Get out as soon as you can. Ask the people at Enron, etc.


Springboard profile image

Springboard 6 years ago from Wisconsin

I think every employee should be invested in the company he or she works for. I understand fully the implications of that, and its part of the reason I think having company stock in your 401k needs to be risk assessed and balanced well within the framework of your entire portfolio. It's like all things financial. You have to take care and be vigilant. There's that old saying, "you'll never get rich unless you own the company." Owning stock in the company you work for is the only way you will ever be able to participate in the company's successes. Pay raises don't count. Promotions don't count. Not when the owners are making millions.(Never mind the failed companies, there's always an example of the one that went wrong...it's why I say balance is important)

Again. Don't put every penny in.

Even in my personal portfolio I balance my risk. Some portion is for high risk, another portion for growth, another portion for value, and another portion for simply income generation and to provide a safety net I can access quickly if I need to.

95% would be a bad idea. Around 3-5% I think is fine. 10% or more you may be taking too much risk.

If one thing fails or even two things, there's enough more successful to pick up the slack.


ivori 6 years ago

Good info! After several years, I did learn to diversify instead of just shoveling the $$ all in one place. Thank you!


adityasatya profile image

adityasatya 6 years ago

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